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18 April, 18:22

Mobic Inc. acquired some manufacturing equipment in January 2015 for $400,000 and depreciated it $40,000 each year for three years on a straight-line basis. During 2018, the manufacturer announced a new technology for this type of equipment that will make the old models obsolete by the end of 2021. As a result, Mobic will plan to replace the equipment at that time, effectively reducing the asset's life from ten to seven years. In its financial statements for 2018, Mobic should:

A) Charge $280,000 in depreciation expense. B) Report the book value of the equipment in its December 31,2018 balance sheet at $210,000. C) Make an adjustment to retained earnings for the error in measuring depreciation during 2015-2017. D) None of these answer choices are correct

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  1. 18 April, 18:25
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    B) Report the book value of the equipment in its December 31,2018 balance sheet at $210,000.

    Explanation:

    Cost = $400,000

    Accumulated Depreciation = $40,000 x 3 = $120,000

    Salvage Value = $0

    Book Value = Cost - Accumulated Depreciation

    = $400,000 - $120,000 = $280,000

    Useful Life = 7 - 3 = 4 Years

    Revised Annual Depreciation = (Book Value - Salvage Value) / Useful Life

    = ($280,000 - $0) / 4

    = $70,000

    Hence the Balance Sheet entry will be as follows:

    Mobic Inc.

    Balance Sheet as of December 31, 2018

    Fixed Assets: $ $

    Equipment 280,000

    Less: Accumulated Depreciation (70,000)

    Book Value of Equipment 210,000

    So the correct answer will be;

    B) Report the book value of the equipment in its December 31,2018 balance sheet at $210,000.
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